THE NEW OVERTIME EXEMPTION REGULATIONS FACTS AND FLOWCHARTS

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1 THE NEW OVERTIME EXEMPTION REGULATIONS FACTS AND FLOWCHARTS A preliminary guide for employers assessing exempt status under the 2016 final regulations 2016, Ogletree, Deakins, Nash, Smoak & Stewart, P.C. The following is a brief summary of information found in the U.S. Department of Labor s regulations as revised under the Final Rule issued in May 2016, and effective December 1, This summary is provided for information only and is not intended as legal advice. Employers should consult legal counsel for more specific guidance.

2 EXECUTIVE Does this employee meet the exempt executive employee requirements? Is the employee paid a salary of at least $913 per week, excluding board, lodging, or other facilities? minimum salary requirement and doesn t meet the Executive Employee test. 2. Does the employee s primary duty involve managing the enterprise or a customarily recognized department or subdivision of the enterprise? Executive Employee test. You may want to proceed to the other white-collar exemption tests (e.g., Administrative or Learned Professional Employee tests) to see if any of those are applicable. 3. then proceed to #3. Does the employee customarily and regularly direct the work of two or more full-time employees or their equivalent (e.g., one full-time employee and two half-time employees)? Executive Employee test. You may want to proceed to the other white-collar exemption tests (e.g., Administrative or Learned Professional Employee tests) to see if any of those are applicable. 4. then proceed to #4. Does the employee have the authority to hire or fire other employees? then is particular weight given to his or her recommendations about changing the status of other employees? Executive. You may want to proceed to the other white-collar exemption tests (e.g., Administrative or Learned Professional Employee tests) to see if any of those are applicable. then he or she satisfies the Exempt Executive Test and can be considered an exempt Executive employee. then he or she satisfies the Exempt Executive Test and can be considered an exempt Executive employee. 1

3 ADMINISTRATIVE Does this employee meet the exempt administrative employee requirements? Is the employee paid a salary of at least $913 per week, excluding board, lodging, or other facilities? Alternatively, is the employee paid on a fee basis that would equal at least $913 per week if the employee worked 40 hours? minimum salary requirement and doesn t meet the Administrative Employee test. 2. Does the employee s primary duty involve performing office or non-manual work that is directly related to the management or business operations of the company or its customers? Administrative Employee test. You may want to proceed to the other white-collar exemption tests (e.g., Executive or Learned Professional Employee tests) to see if any of those are applicable. 3. then proceed to #3. Does the employee s primary duty require him or her to exercise discretion and independent judgment with regard to significant business matters? Administrative Employee test. You may want to tests (e.g., Executive or Learned Professional Employee tests) to see if any of those are applicable. then he or she satisfies the Exempt Administrative Employee test and can be considered an exempt Administrative employee. 2

4 LEARNED PROFESSIONAL Does this employee meet the exempt learned professional employee requirements? Is the employee paid a salary of at least $913 per week, excluding board, lodging, or other facilities? Alternatively, is the employee paid on a fee basis that would equal at least $913 per week if the employee worked 40 hours? minimum salary requirement and doesn t meet the Learned Professional Employee test. 2. Does the employee perform work that requires advanced knowledge (e.g., beyond high school), is the work predominately intellectual in character, and does the employee consistently exercise discretion and independent judgment in carrying out such duties? Learned Professional Employee test. You may want to tests (e.g., Creative Professional test) to see if any of those are applicable. 3. then proceed to #3. Is the advanced knowledge, and the occupation, in a field of science or learning (e.g., professions of law, medicine, theology, accounting, engineering, architecture, or teaching but not in a field of mechanical arts or skilled trades)? Learned Professional Employee test. You may want to tests (e.g., Creative Professional test) to see if any of those are applicable. 4. then proceed to #4. Was the advanced knowledge acquired by a prolonged course of specialized intellectual instruction (i.e., does the employee possess the appropriate academic degree, or does the employee have substantially the same knowledge level and perform substantially the same work as the degreed employees but possess his or her advanced knowledge only through a combination of work experience and intellectual instruction)? Learned Professional Employee test. You may want to tests (e.g., Creative Professional test) to see if any of those are applicable. then he or she satisfies the Learned Professional Employee test and can be considered an exempt Learned Professional employee. 3

5 CREATIVE PROFESSIONAL Does this employee meet the exempt creative professional employee requirements? Is the employee paid a salary of at least $913 per week, excluding board, lodging, or other facilities? Alternatively, is the employee paid on a fee basis that would equal at least $913 per week if the employee worked 40 hours? then he or she does not meet the minimum salary requirement or the fee basis requirement and does not meet the Creative Professional Employee test. 2. Does the employee s primary duty consist of performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor? Creative Professional Employee test. You may want to proceed to the other white-collar exemption tests (e.g. Executive, Administrative, or Learned Professional Employee tests) to see if any of those are applicable. 3. then proceed to #3. Work that can be produced by a person with general manual or intellectual ability or training generally does NOT qualify for purposes of the Creative Professional Exemption. Does this person s work go beyond that which can be produced by a person with general manual or intellectual ability or training? Creative Professional Employee test. You may want to proceed to the other white-collar exemption tests (e.g. Executive, Administrative, or Learned Professional Employee tests) to see if any of those are applicable. then he or she satisfies the Creative Professional Employee test and can be considered an exempt Creative Professional employee. 4

6 COMPUTER PROFESSIONAL Does this employee meet the exempt computer professional employee requirements? Is the employee paid a salary of at least $913 per week, excluding board, lodging, or other facilities or an hourly rate not less than $27.63 per hour? Alternatively, is the employee paid on a fee basis that would equal at least $913 per week if the employee worked 40 hours? minimum salary requirement and doesn t meet the Computer Professional Employee test. 2. Is the employee a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field? Computer Professional. You may want to tests (e.g., Administrative Employee test) to see if any of those are applicable. 3. then proceed to #3. Does the employee s primary duty involve systems analysis techniques and procedures (e.g., consulting with users to determine hardware, software, or system functional specifications)? then he or she may not satisfy the Computer Professional Employee test. Proceed to #4 to see if it is applicable. then he or she satisfies the Computer Professional Test and can be considered an exempt Computer Professional employee. 4. Does the employee s primary duty consist of the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes based on and related to user or system design specifications? then he or she may not satisfy the Computer Professional Employee test. Proceed to #5 to see if it is applicable. 5. then he or she satisfies the Computer Professional Test and can be considered an exempt Computer Professional employee. Does the employee s primary duty consist of the design, documentation, testing, creation or modification of computer programs related to machine operating systems? then he or she may not satisfy the Computer Professional Employee test. However, if his or her primary duties consist of a combination of any of the above duties, the performance of which requires the same level of skills, then he or she satisfies the test and is an exempt Computer Professional employee. then he or she satisfies the Computer Professional test and can be considered an exempt Computer Professional employee. 5

7 HIGHLY COMPENSATED Does this employee meet the exempt highly compensated employee requirements? Is the employee guaranteed $134,004 in total annual compensation, excluding board, lodging, or other facilities but including other compensation such as commissions and nondiscretionary bonuses? Highly Compensated Employee test. You may want to tests (e.g., Administrative Employee test) to see if any of those are applicable. 2. Highly Compensated Employee test. then proceed to #3. Does the employee s primary duty involve performing office or non-manual work? Highly Compensated Employee test. 4. Does the employee s total compensation include a salary of at least $913 per week, excluding board, lodging, or other facilities? 3. then proceed to #4. Does the employee customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee as detailed in the respective tests for each? Highly Compensated Employee test. then he or she satisfies the Highly Compensated and can be considered an exempt Highly Compensated employee. 6

8 OUTSIDE SALES Does this employee meet the exempt outside sales employee requirements? Is the employee s primary duty making sales or obtaining orders or contracts for services or for the use of facilities? Outside Sales Employee test. You may want to tests to see if any of those are applicable. 2. Is the employee customarily and regularly engaged away from the employer s place(s) of business or other fixed sites for the purpose of selling the employer s products, services, or facilties? Outside Sales Exemption test. You may want to tests to see if any of those are applicable. then he or she satisfies the Outside Sales Employee test and can be considered an Outside Sales employee. Definitions and Examples MAKING SALES includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. OBTAINING ORDERS OR CONTRACTS FOR SERVICES OR FOR THE USE OF FACILITIES includes the selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other transportation agencies. The word services extends the exemption to employees who sell or take orders for a service. The actual performance of the services for the customer may be by someone other than the person taking the order. 7

9 DEFINITIONS AND Examples SALARY defined: An employee will be considered to be paid on a salary basis if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to exceptions provided within the Fair Labor Standards Act (FLSA)regulations, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. For purposes of the Executive, Administrative, Learned Professional, Creative Professional, and Computer exemptions, up to 10 percent of the minimum salary requirement (i.e., no more than $930 per week) may be satisfied through the payment of nondiscretionary bonuses, commissions, or other incentive payments as long as those payments are made on a quarterly or more frequent basis. Nondiscretionary bonuses, incentive payments, and commissions cannot be used to satisfy any portion of the minimum salary requirement for the Highly Compensated Employee exemption, but they may count toward that exemption s total compensation requirement. BOARD, LODGING OR OTHER FACILITIES defined: free and clear or independent of any claimed credit for non-cash items of value that an employer may provide to an employee. See 29 C.F.R. 531 for a full definition of board and lodging. Other facilities refers to items similar to board and lodging, such as meals furnished at company restaurants or cafeterias or by hospitals, hotels, or restaurants to their employees; meals, dormitory rooms, and tuition furnished by a college to its student employees; merchandise furnished at company stores and commissaries; housing furnished for dwelling purposes; and transportation furnished to employees for ordinary commuting between their homes and work. FEE BASIS defined: An administrative or professional employee may be paid on a fee basis instead of a salary basis. Payment on a fee basis occurs if the employee is paid an agreed sum for a single job regardless of the time required for its completion. These payments resemble piecework payments with the important distinction that, generally, a fee is paid for the kind of job that is unique rather than for a series of jobs repeated an indefinite number of times for which payment on an identical basis is made over and over again. Payments based on the number of hours or days worked and not on the accomplishment of a given single task are not considered payments on a fee basis. To determine whether the fee payment meets the minimum amount of salary required for exemption, the amount paid to the employee will be tested by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least $913 per week if the employee worked 40 hours. 8

10 DEFINITIONS AND Examples (Continued) PRIMARY DUTY defined: the principal, main, major, or most important duty that the employee performs. Determination of an employee s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee s job as a whole. Some factors to consider are: the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee s relative freedom from direct supervision; and the relationship between the employee s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. CUSTOMARILY AND REGULARLY defined: a frequency that must be greater than occasional, but which, of course, may be less than constant. Tasks or work performed customarily and regularly include work normally and recurrently performed every workweek; it does not include isolated or one-time tasks. DIRECTLY AND CLOSELY RELATED defined: tasks that are related to exempt duties and that contribute to or facilitate performance of exempt work. It may include physical tasks and menial tasks that arise out of exempt duties, and the routine work without which the exempt employee s exempt work cannot be performed properly. It may also include recordkeeping; monitoring and adjusting machines; taking notes; using the computer to create documents or presentations; opening the mail for the purpose of reading it and making decisions; and using a photocopier or fax machine. Work that is directly and closely related to the performance of exempt work is also considered exempt work. DISCRETION AND INDEPENDENT JUDGMENT defined: involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. MANAGEMENT defined: generally management includes activities such as interviewing, selecting, and training employees; setting and adjusting employees rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees productivity and efficiency for purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning work among employees; determining the type of materials, supplies, machinery, equipment, or tools to be used or merchandise to be bought, stocked, and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of employees or property; planning and controlling a budget; and monitoring or implementing legal compliance measures. CUSTOMARILY RECOGNIZED DEPARTMENT OR SUBDIVISION defined: must have a permanent status and a continuing function. If an enterprise has more than one establishment, the employee in charge of each establishment may be considered in charge of a recognized subdivision of the enterprise. 9

11 DEFINITIONS AND Examples (Continued) PARTICULAR WEIGHT defined: the suggestions or recommendations that are part of an employee s job duties; the frequency with which such suggestions and recommendations are made or requested; and the frequency with which the employee s suggestions and recommendations are relied upon. DIRECTLY RELATED TO MANAGEMENT OR GENERAL BUSINESS OPERATIONS defined: work directly related to assisting with the running or servicing of the business as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment. SIGNIFICANT BUSINESS MATTERS defined: the level of importance or consequence of the work performed. Some factors to consider when determining if an employee exercises discretion and independent judgment with respect to matters of significance are if the employee has the authority to formulate, affect, interpret, or implement management policies or operating practices; authority to carry out major assignments in conducting the operations of the business; authority to perform work that affects business operations to a substantial degree; authority to commit the employer in matters that have significant financial impact; or authority to waive or deviate from established policies and procedures without prior approval. See 29 C.F.R for a more exhaustive list of factors to consider. EDUCATIONAL ESTABLISHMENTS defined: elementary or secondary school system, an institution of higher education, or other educational institution. Other educational institutions include special schools for mentally or physically disabled or gifted children, regardless of any classification of such schools as elementary, secondary, or higher. WORK REQUIRING ADVANCED KNOWLEDGE defined: work that is predominately intellectual in character and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine mental, manual, mechanical, or physical work. Usually, advanced knowledge is used to analyze, interpret, or make deductions from varying facts or circumstances. FIELD OF SCIENCE OR LEARNING defined: includes traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy, and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades. 10

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